Can Best Buy Reboot?

Best Buy's big announcement last week that it plans to close 50 stores this year while opening 100 smaller locations sent shivers through the retail industry. The new strategy seeks $800 million in cost reductions by fiscal 2015, including approximately $250 million in fiscal 2013.

After 50 years of putting mom and pops out of business, big-box retail is having a mid-life crisis. A slow economy has hurt same-store sales, narrowing margins at big stores. Meanwhile, consumers, armed with price-comparison technology, are visiting more stores seeking deals or exclusive merchandise rather than making one-stop, fill-the-cart excursions.

Industry watchers who monitor the country's largest electronics retailer weren't surprised. For years, they've warned about pressure from online-only retailers like Amazon.com, not to mention general-purpose discounters like Costco, Target, and Wal-Mart.

Over the last full fiscal year, Best Buy lost $1.2 billion, or $3.36 a share. That compares with a profit of $1.3 billion, or $3.08 a share, a year earlier.

But before making Best Buy the poster child for the End of Retail as We Know It, it's worth examining the marketing missteps the retailer has made, both online and off.

Online
Best Buy has seen the online shift in consumer buying patterns in its own business. On a call with analysts last week, it reported that in the most recent quarter, online sales increased about 20 percent, and same-store sales declined 2.2 percent. The company said it plans to increase online sales domestically by 15 percent this year.

Speaking of online operations, it's likely Best Buy lost customers last year after it cancelled orders days before Christmas because it received a bigger-than-expected response to seasonal promotions.

Finally, critics complain that Best Buy has not integrated its online operations tightly with its brick-and-mortar locations. Chief executive Brian Dunn, who outlined the restructuring plan last week, emphasized that the remodeled stores would do a better job of letting shoppers pick up purchases they've made online.

Offline
Whatever happens online, the key to the company's survival is whether it can revitalize its bread-and-butter brick-and-mortar business. Best Buy has about 1,100 locations in the US.

Along with the closings and staff reductions, last week's plan calls for remodeling the stores with a “connected store format” that focuses on mobile, video, and broadband connections. How this will make the stores more functional, entertaining, or educational for consumers was not spelled out.

Might there be hope in emphasizing the growing consumer electronic categories? On its analyst call last week, Best Buy revealed that tablet and e-reader sales grew by triple digits, but it reported a comparable decline in notebook, television, digital camera, and gaming product sales.

With this as context, it's easy to see why the company is betting on its Best Buy Mobile stores, which number about 305 today. The company said it will open 100 more of the smaller-format stores this year and will have 600-800 by 2016. But will these boutique stores stanch the consumer habit, enabled by smartphone apps, of treating retailers as little more than showrooms for goods that can be purchased less expensively online?

Downes also took a crack at answering the question Businessweek asked about the future of retailers:

What’s left for the retailer? Maybe not much. At best, there are still a few items -- for example, high end stereo equipment and televisions -- where the retailer may still hold the upper hand. These purchases often require seeing and hearing in-person (what economists call “experience” goods) and their technical complexity (the stuff inside) leaves most consumers needing a trusted expert to help navigate choices, options, features and functions.

But if knowledgeable and trusted salespeople are to be Best Buy's salvation for its retail stores, the prognosis is not good. Even a cursory review of consumer critiques on the Web finds a wealth of negative commentary about its retail employees, including its Geek Squad technical service department (for example). Perhaps acknowledging this problem, Dunn said the company would boost its employee training investment by 40 percent.

Based on my recent experiences with local stores, I really thought that they had some good prospects. I've received good service from helpful and mostly knowledgeable staff. The prices have been competetive and, most importantly, I can walk in, buy somethiing, and take it with me.

A spokeswoman for Best Buy issued a statement that said: "Certain issues were brought to the board's attention regarding Mr. Dunn's personal conduct, unrelated to the company's operations or financial controls, and an audit committee investigation was initiated. Prior to the completion of the investigation, Mr. Dunn chose to resign."

That makes Best Buy's initial statement at the time of the resignation particularly interesting. The Times notes:

"There was mutual agreement that it was time for new leadership to address the challenges that face the company," a statement from Best Buy's board said at the time. "There were no disagreements between Mr. Dunn and the company on any matter relating to operations, financial controls, policies or procedures," it said.

Karl - Agreed. Best Buy needs to double down on retail, and invest in great training for its salespeople. They need to make shopping for electronics a pleasure rather than the unpleasant chore that it currently is.

I think it doesn't really matter if you are a retail guy or a digital marketing fan. The individuals at the CXX level are qualified to deal with these issues on a daily basis. What matters is, do they really want to change the direction of business?

Like Strasser said, change is not going to happen overnight. It is a gradual process and will require time and efforts. The retail market has a lot of potential and we will have to wait to see if the next CEO capitalizes.

The article also notes that Dunn was a retail guy and that BB wants to go in a digital direction. IMO, this won't end well. The retail market is wide open and viable, but it will take smarts and a commitment to service excellence. Given the head start that Amazon and NewEgg have, I think that it's easier to train a good workforce than to overtake the established outlets.

This may also be good news for Staples and other office products companies. No one else is handling retail computer components. (Where do I go to pick up a VGA adapter for an iPad for a presentation this afternoon?)

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